Recovery Underway, Bernanke Suggests

Even as he warned that the expansion could prove lackluster, new data released Tuesday provided evidence that the economy was turning around, showing that Americans returned to stores in August and increased their spending at the highest rate in three years.

With consumers flooding auto dealerships to take advantage of the "Cash for Clunkers" program, total retail sales rose 2.7 percent over the previous month, the Commerce Department said. What surprised analysts was that even excluding auto sales and gasoline, retail sales rose a solid 0.7 percent.

That eased fears, shared by many economists, that the bump in auto sales would come at the expense of spending on other goods and services. In August, at least, people did not scrimp on other purchases even while buying new automobiles.

Bernanke, meanwhile, acknowledged what a growing chorus of analysts has concluded: That the economy bottomed out this summer and is now expanding, at least as measured by gross domestic product. Many forecasters say the nation's output of goods and services is now rising at an annual rate of 3 percent or higher. But the Fed chairman also described continued weakness in the job market.

"Even though from a technical perspective the recession is very likely over at this point, it's still going to feel like a very weak economy for some time, as many people will still find that their job security and their employment status is not what they wish it was," Bernanke said in response to a question after a speech at the Brookings Institution.

His comment about the recession ending was more blunt than in other recent appearances, for instance in August, when he said only that "economic activity appears to be leveling out" and that "prospects for a return to growth in the near term appear good."

Bernanke cautioned that the recovery may not be strong enough in 2010 to generate significant job growth or bring down the unemployment rate. The economy needs to grow in the short term faster than its long-term trend, or else "it'll be relatively slow in creating jobs over and above those needed to employ people coming into the labor force," Bernanke said. "Therefore, the unemployment rate would tend to come down quite slowly."

Spending Here, Not There

The promising forecast for the second half of 2009 reflects efforts by businesses to replenish their depleted inventories and increased government spending as the stimulus program shifts into high gear.

But prospects for the rest of the year may not be so rosy. Economists think the clunkers program encouraged people simply to buy new cars sooner, perhaps at the expense of other major purchases. In addition, August is the peak of the back-to-school shopping season, and several states declared sales-tax holidays last month to encourage spending.

"This tapped out consumers to some extent," said Brian Bethune, chief U.S. financial economist for IHS Global Insight. "There's no way that the consumers can really fire on all cylinders here."

Arlington resident Erin Slattery, 26, has cut back on dinners since moving from Kansas City earlier this year. But she and her boyfriend, who live together, decided to take advantage of the Cash for Clunkers program and turn in his 1998 Jeep Cherokee for a new Jeep Patriot.